Can Starbucks change the rule of the game in India?

The store opening is a tangible vote of confidence in India's beleaguered economy. The coffee shop industry in India, which is the world's sixth largest coffee exporter, is growing at a compounded annual growth rate of 25 per cent for the past few years.

Avani Saglani Davda, who has worked for the Tata group for over a decade, is the chief executive of the venture. Most recently, she served in the vice-chairman's office of Tata Global Beverages, where she was responsible for marketing and business development, and helped forge the Starbucks partnership.

The store opening is a tangible vote of confidence in India's beleaguered economy. The coffee shop industry in India, which is the world’s sixth largest coffee exporter, is growing at a compounded annual growth rate of 25 per cent for the past few years.

The government has opened its retailing market to foreign players, over loud populist protests, in a bid to boost growth and improve its reputation among skeptical foreign investors. Wal-Mart and IKEA have also said they intend to open retail outlets in India soon.

According to brokerage CLSA, expectations are high from the world’s largest coffee house, which may change the landscape in a nation that has less than 2,000 outlets today. The café culture, which made a humble beginning in 1996 in Bangalore, already faces challenges like small ticket size (calculated as total sales divided by the number of invoices) and competition from other formats.

Coffee consumption in India grew by 3 per cent to 1.06 lakh tonnes in 2011 as compared to 2010, according to data from the International Coffee Organisation. According to the government-run Coffee Board of India, domestic consumption increased by 6 per cent to 1.08 lakh tonnes in 2010 from 1.02 lakh tonnes in 2009.

Traditionally, coffee is the more popular beverage in south India, while the North prefers tea. However, the trend is changing, shows a recent survey by the Coffee Board of India. The number of casual coffee drinkers has risen significantly in the last few years in the non-South regions of the country.

Starbucks’ China foray in 1999 created a lot of concern due to a complex market with a strong consumer preference for tea in addition to low average ticket size, according to CLSA. Today, China is the second largest market (after US) and Starbucks reportedly plans to treble the outlets by 2015 to 1,500.

Starbucks in China is now considered as an aspirational brand. Local alliance, product customisation and premium focus were key success factors for Starbucks in China.

In India, while its association with the Tata group and tailor-made offerings (Tata Tazo Tea) are already in place, only time will show if it is able to make a bond with India’s value-conscious consumer.

Despite a history of 16 years and stunning growth in the recent past, India had just about 1,600 cafes in 2011, according to CLSA. One of the key challenges in India is the high preference for tea over coffee, as a habitual drink—this may change as even FMCG majors like Nestle and HUL are focusing on expanding coffee markets in India.

A typical café in India also competes with a neighbourhood restaurant, which offers several options and operates on a low-cost model.

While the natural inclination for any new entrant would be to operate in premium segment, which accounts for around 22-25 per cent of the overall market, the challenge would be to please India’s value conscious buyers and get scale, CLSA noted.